Homeownership and the White-Black Wealth Gap
In two recent articles, I showed some of the reasons that black Americans have had such a hard time narrowing the wealth gap with whites. Here's another: For too many, the financial system has kept homeownership out of reach.
Homeownership is, of course, an important driver of wealth. Regular mortgage payments have traditionally acted as a form of saving, setting families on the path to financial security. For blacks, however, this has been much less true. For much of the 20th century, practices such as redlining (in which banks avoided lending in predominantly black neighborhoods) made financing a home difficult. Then, in the 2000s, the subprime boom inundated black neighborhoods with precisely the wrong kind of credit: loans with features that sharply increased the risk of foreclosure.
The result has been devastating. A recent study by the Urban Institute's Housing Finance Policy Center found that as of 2015, the black homeownership rate stood at just 41.2 percent -- the lowest level since the 1960s, when racial discrimination was still legal. That fell far short of the rate for whites, which exceeded 70 percent. Here's a chart:
Worse, the subsequent contraction in credit is locking out many black Americans who should otherwise qualify for mortgages. In other words, the financial system targeted blacks with bad loans precisely at the wrong time to borrow, and now is making it difficult for them to buy homes at a time when interest rates and prices are more advantageous. Here's a chronological look at the number of mortgage originations for home purchases by black and white borrowers (again from the Urban Institute):
Surely, a return to irresponsible lending isn't the answer. That said, there's a lot that lenders -- particularly the government-controlled giants Fannie Mae and Freddie Mac -- can do to reach more qualified black borrowers. For one, they can use more advanced measures of creditworthiness than the FICO scores they have traditionally employed. They can also be more flexible in the way they count second jobs in assessing income, and consider the resources of parents or other relatives (which Fannie Mae has done in its HomeReady program, but only to a limited extent).
The government, for its part, could help more people meet minimum requirements by expanding the earned income tax credit, a program that supplements the incomes of the working poor. It could also safely expand credit by easing constraints on community banks that focus on know-your-customer lending and keep mortgage loans on their books.
Some of these solutions are capable of garnering bipartisan support. This may not be on the Trump administration's agenda, but it should be.
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